Credit card companies make less money off smart customers.
Interest rates and fees pad their profits, so it’s more lucrative for them when you don’t understand what you’ve agreed to. It doesn’t help that cardholder agreements are full of fine print.
So the more you learn about how credit cards work, the more of your hard-earned money you can keep in your pockets.
Rates are not fixed
The annual percentage rate (APR) – or the yearly interest credit cards charge – can change more often than you might realize.
It’s not a secret, but it’s not common knowledge either. How an APR is computed is typically outlined in a cardholder’s agreement in legal jargon that makes the average person’s eyes glaze over.
There are also factors beyond your control that can affect your APR. For example, when the Federal Reserve raises its benchmark federal funds rate target, credit card APRs tend to follow suit.
Rewards may be worth less than they seem
Financial technology news site PYMNTS recently published the headline “Discounts for Cash Purchases Jump 66% Since 2015.”
Citing data from a Federal Reserve Bank of Atlanta report, PYMNTS’ main takeaway is that many retailers prefer you spend cash at their stores. And some are now offering discounts to customers who pay with cash rather than credit.
Credit card companies charge transaction fees to businesses when a customer pays with credit. That gives mom-and-pop stores in particular incentive to offer discounts on cash transactions.
But if cash discounts make purchases cheaper than your credit card’s yearly fee and APR costs, then the rewards you earn by paying with credit aren’t worth as much as their face value. Depending on where you shop, the rewards may not be worth pursuing.
Late payments can cost more than a late fee
Paying with a credit card is basically using a bank’s money. There are consequences in place to discourage late repayments. It’s not just a late fee: Your credit score could take a hit, your interest rate could rise and you might miss out on promotional offers.
But credit card companies — which make money from fees and higher rates — tend not to broadcast the repercussions of a late payment. And perhaps unsurprisingly, many people are in the dark about the repercussions beyond late fees.
In 2023, the trade organization Consumer Bankers Association polled 1,200 adults in the U.S. One question was about the repercussions of paying a credit card bill 30 or more days late. The most common response — cited by 48% of survey respondents — was, “I pay a late fee and nothing else happens until my next payment is due.”
What they don’t know will cost them.
Cash advances aren’t cheap
Credit card companies typically allow you to borrow cash directly from your line of credit. It’s called a cash advance and available often at a hefty price.
Credit bureau Experian says the most common fee is the greater of 5% of the cash advance or $10. You’re also usually charged a higher APR on cash advances than you are charged for regular credit card purchases.
Between interest and fees, it could cost $18.32 to take out a $100 cash advance if you repaid it in six months. Someone with good credit can get a personal loan with a much lower interest rate, according to Experian.
You can just ask for a break
Are you a longtime credit card holder who always makes timely payments? You may qualify for better terms, a higher credit limit or a lower annual percentage rate. Here’s the trick: You have to ask.
As Money Talks News previously reported in “An Easy Way to Improve Your Credit Card Terms — and Possibly Your Credit Score,” a 2019 poll of more than 1,000 cardholders found that many of those who requested things like getting a fee waived or a credit limit increased got it.
An interesting takeaway from CompareCards, the company that commissioned the survey, was that “few card holders have bothered to ask for these changes.”
The moral to the story: It pays to ask questions.
To learn about other fees and fines you might be able to dodge, check out “6 Credit Card Costs You Should Never Pay.”
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